Why Driving Innovation has Become Procurement’s Top Priority

Why Driving Innovation has Become Procurement’s Top Priority

The research paper from Patrick Connaughton and Christopher S. Sawchuk ‘The CPO Agenda: Procurement’s Key Issues in 2014’* gives a good insight into the shift in focus among CPOs towards increasingly embracing a more innovative approach to procurement. In the paper, the authors describe how innovation-based growth has become increasingly important, particularly in the context of a business environment that continues to be characterised by ‘persistent uncertainty’ dating back to the 2008 crisis.

“Traditionally, innovation was usually associated with a desire to accelerate growth. But in today’s environment, it is a prerequisite for simply maintaining past growth rates and staying competitive. This revised perspective on the purpose of innovation represents a profound break with the past, one requiring pervasive changes in every business services organization, including procurement.”

The authors go on to argue that the context for this innovation-based growth remains challenging given the ongoing resource constraints within the procurement community where they are required to ‘do more with less’.

“But, with budgets and staffing levels in 2014 expected to grow only slightly, procurement’s reinvention efforts have to be self-funded. This will be especially difficult because they will be handling even more work than last year if current projections of 5 to 7% revenue growth in 2014 hold true.”

They go on to describe how the findings indicate that cost is no longer a primary concern, as expanding the scope of procurement’s spend influence and driving innovation have become top priorities. This shift may also reflect the fact that there is a sense that any further attempts to focus on ‘price’ will lead to an additional degradation in quality.

The findings in this report are also consistent with my experience from attending the recent World Procurement Congress event in London, where the focus was very much on delivering real partnerships with suppliers, and ensuring robust supplier risk processes were in place.

Historically, the language surrounding contracts has been adversarial with the respective parties looking to gain the upper hand. The more recent shifts towards viewing contracts as opportunities to drive mutual value, and as potential sources of competitive advantage represents a sea change and helps ensure the incentives of both parties are aligned.

The emergence of concepts like sourcing optimization (or market-informed sourcing) plays very much into this shift towards more innovative approaches to sourcing. The focus on having suppliers price solely against a lot or line item, is being replaced with approaches that increasingly focus on more ‘expansive bidding’ so that richer descriptions of conditional offers or variant products/services are explored. This approach is very much grounded in exploring the ‘art of the possible’, where win-win outcomes can be delivered.

The authors conclude by arguing that:

“To help execute an innovation-based business strategy, procurement needs to be a high-value-added, best-practice-driven internal service provider, rather than a department whose main goal is to continually expand its control over spending.”

Shifting the focus towards innovation, and strategic partnerships, helps ensure procurement’s importance increases beyond its historically narrower remit. The appeal for practitioners is also obvious not least because it can make for more interesting roles. And when contracting parties can take a more holistic view beyond negotiating on price the range of mutually attractive outcomes can increase significantly.